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Panama Economic Update July 2018

There’s nothing like a new free trade agreement to get excited about the general direction Panama’s heading in, right?

Panama and China opened free trade talks this month in Beijing with the aim of crafting an agreement that could make Panama the port of entry for Chinese goods destined for the rest of Latin America. While there’s nothing set in stone yet, the talks set the tone for the negotiations and allowed both sides to lay down some rules and terms, like intellectual property rights, legal frameworks, barriers to commerce, and more.

Needless to say, none of this could have been possible without the establishment of diplomatic ties with China last year, which has already resulted in over 20 bilateral agreements as well as the start of direct flights between the two countries. Panama’s chief negotiator in Beijing, Alberto Aleman, said the trade agreement aimed to include 20 chapters in total. The second round of talks will be held in August.

In infrastructure news, a Chinese consortium won the $1.42 billion bid to design and build the Fourth Bridge over the Panama Canal. The consortium includes China Communications Construction Company and its subsidiary China Harbor Engineering Company. The 6.5-km (4-mile) bridge will have six car lanes and a two-way metro line. Construction is expected to start this year and will take three years to complete.

It’s yet another sign of China’s growing share of the pie in Panama and in Latin America more broadly. A new report by Moody’s shows how Chinese investment — both FDI and credit — is set to grow in the coming years, given the high quality of raw materials, infrastructure needs and favorable demographic trends China sees in the region.

Over the last decade, the scope of Chinese investment in Latin America has diversified away from raw materials to services, including in the financial sector. Between 2005 and 2016, China lent $222Bn to governments in Latin America and the Caribbean (53% of it went to Brazil alone); half of which was destined for infrastructure projects and a third to energy projects.

But, according to Moody’s, there’s also a risk to some of the investment, especially in countries where access to financing is limited. “A reliance on highly discretionary loans introduces possibly adverse elements into the credit profiles of some sovereigns, such as higher debt burdens and weaker trade balances and, therefore, increases the risk of refinancing… as well as the creation of concomitant credit risk, when the projects financed with debt do not generate enough income to pay it.” Some food for thought for Panama, for sure, though, as we’ve shown you in some of our featured articles in the past, Panama’s economy looks to be on a solid footing.

In Canal news, passenger transits aboard cruise liners and LNG shipments have been making headlines recently. As the cruise season heats up between September and December, 80 cruise ships with ~200,000 tourists on board are expected to cross the Canal at the port of Colón. Pullmantour’s Monarch is still the crown jewel of the port, with 16 departures on the schedule bringing visitors from Latin America en route to the Caribbean. Looking ahead, various other cruise liners, like Norwegian Cruise Line, are adding larger vessels and more options to cruise the expanded Canal too, so look out for a further boost in those numbers next year.

Preparing for increased capacity, the Canal is also planning to revise its rules for LNG tankers as of October. Under the revised rules, LNG tankers will be able to transit the Canal at night (as other vessels currently do), and two LNG tankers traveling in different directions will be permitted to move through the Canal at the same time. LNG transits are expected to continue to grow as more export terminals are opened along the U.S. Gulf Coast, increased LNG supply moves to Central American destinations, and demand from Asia grows.

Here’s a helpful breakdown of Canal transits by market segment from Natural Gas Intel:

Image from Natural Gas Intelligence (NGI)

Alongside China, Chile too has been making headlines on the bilateral trade front.

During Chilean President Sebastián Piñera’s trip to Panama, Chile agreed to become the first Latin American ally of Panama’s Logistics Hub, allowing the Southern Cone nation to benefit from the logistics platform for its agri-food exports. The two countries also launched a joint effort to promote the Pacific-South cruise route, linking Panama to Valparaíso, aimed at increasing tourism to both countries. Chile is the top Latin American user of the Canal and #3 globally.


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